Sunday, July 21, 2013

Turkey headed for a recession

Turkey has been reasonably well shielded from troubles in the Eurozone, avoiding the recession that has plagued a great number of European nations. But recently Turkey has been pressured by a combination of unusually turbulent incidents of social unrest that have led to rising political polarization as well as by sharp capital outflows resulting from the emerging markets rout and weak global demand. At the same time the government's ongoing actions will serve to further destabilize economic growth. It now looks increasingly less likely the nation will be able to avoid a recession.

JPMorgan: - In Turkey, although more concerned about bond valuations initially, we
now see some real fundamental risks in the medium term. The story of
massive portfolio inflows supporting Turkey’s growth and investment
case may disappoint going forward. Even if CBT manages to stabilise
the local market, it is not clear whether its actions would be enough to
really make the local market competitive globally again. Apart from the
challenges posed by higher US rates, stronger commodities and the
ongoing ‘EM repricing’, monetary authorities seem more limited
politically in their ability to implement necessary decisions. Every
investor pull-back in Turkey always risks turning into a self-reinforcing
cycle of lower asset prices and real macro deterioration, in our view.

The recent civil unrest has already shown up in declining consumer demand.

Even more troubling now is the fact that the government bond yield curve has been inverted for some time - a clear sign of an impending economic downturn.

How is the government responding to these new pressures? The authorities are doing what many governments normally do in a time of crisis - they "wag the dog". After accusing foreign reporters of attempting to destabilize the country, they are now blaming the nation's problems on credit card companies.

WSJ: - Turkey is hell-bent on destroying its newest enemy: the “interest-rate lobby” that the government blames for seeking to destabilize the country for its own profit. And credit cards are the latest front in the fight.

“It’s not for nothing that I recently mentioned the interest-rate lobby… and there’s also a lobby that prospers with non-interest gains. Those credit cards you keep talking about, don’t get them,” Prime Minister Recep Tayyip Erdogan told a constituency in Ankara as they broke their Ramadan fast in the capital Tuesday evening. “Who’s footing the bill? Not the rich but my poor brothers.”

While these types of actions are not surprising coming from Iran or Argentina, it's quite sad that Turkey is resorting to such tactics as well. This will only serve to send investors fleeing domestic markets, push up interest rates, and put a damper on consumer confidence. Ironically it will be the recession - more than any other factor - that will erode remaining support for Prime Minister Erdogan.